Directors Loans

[Nixon Williams]

It looks even more attractive if you are paying off a high interest debt, like a credit card but don't be tempted because you will just max out your credit cards again and have no money to pay your company back and this will land you in a lot of trouble. Remember that from the company's point of view, this is a LOAN that MUST be repaid or you will get stung by the Corporation Tax implications of overdrawn directors' loan accounts. DON'T do it if there is any risk that you will default on it. To my mind, the only safe option is using the director's loan to reduce the balance on a fully flexible mortgage where you can borrow the money back at any time.

I would advise caution here, any loan that is outstanding at the company’s yearend is subject to a corporation tax surcharge under section 455 of the Corporation Tax Act 2010 (section 455 CTA2010).

The surcharge value is calculated as 25% of the outstanding loan at the yearend and is payable with the corporation tax at the normal due date.

However, if part or all of the loan is repaid within 9 months of the yearend then the surcharge charged is reduced by 25% of the repaid amount and as such, if the whole loan is repaid within 9 months of the yearend, there will be no surcharge applied.

The surcharge is repayable by HMRC but only at a point when the director’s loan has been cleared. In this case, any monies paid under the surcharge will be repaid to the company 9 months after the end of the accounting period in which the loan is repaid.

You also need to be wary of so called 'bed & breakfasting', basically speaking, if you take out a loan, repay it on 30th November (for example) to avoid the section 455 charge then take out a new loan for the same amount on 1st December, HMRC would deem there to have been no repayment and as such the section 455 tax would be due.

If you wish to take a new loan out shortly after repaying one you should ensure it is for a different amount, a different purpose and leave as big a gap as possible between the loans. This bed and breakfasting is again something we would advise against.

Alan

[minstrel]

I fully agree with Alan here that you need to be very careful to ensure you don't have any loan outstanding at year end to avoid the S455 charge

I also agree that it is prudent to leave a gap and make the loans for different amounts.

I do sometimes wonder if there are any examples of HMRC taking action over this strategy and what the risk is.

If the loan doesn't show on balance sheet at the end of year it won't be reported to HMRC, so there would be nothing to prompt an investigation. Although I accept this could come up in a detailed investigation where HMRC ask you to account for every bank transaction.

Also, my understanding is the S455 charge is largely to reduce the tax advantage a Director could make by using the loan as income, not paying any tax and then defaulting on the loan repayment. I imagine HMRC could come after company and force it to recover loan, but it's a lot easier for HMRC just to discourage these arrangements by whacking on a 25% S455 charge and getting you to "pay it forward". They'll then give it back if when Director pays it back.

Alan have you had clients that have had action taken against them by HMRC for these sort of transactions? I fully agree with you that yours is the less risk approach. It would be interesting to know how this is implemented in practice by HMRC. It's only relatively recently that the low beneficial loan interests rates have made this sort of arrangement worthwhile.

[Nixon Williams]

Alan have you had clients that have had action taken against them by HMRC for these sort of transactions? I fully agree with you that yours is the less risk approach. It would be interesting to know how this is implemented in practice by HMRC. It's only relatively recently that the low beneficial loan interests rates have made this sort of arrangement worthwhile.

Luckily, we manage to keep most of our clients outside of this minefield, however we have had a few clients where the S455 tax has had to be paid etc.